What is Umbrella Company Scheme?
For an independent contractor, an Umbrella company plays the role of an employer and the contract operates under a temporary agreement, typically through a recruitment organisation. An Umbrella company is intended to eliminate almost all the company management and supervision activities related to a limited company, and this makes Umbrella companies a prevalent option for contractors. Umbrella Company has become more predominant from the time when the United Kingdom government introduced ‘IR35’ (a tax legislation to tackle tax avoidance activities carried out by workers offering services to customers via an intermediate, for example a limited company) legislation that makes it less advantageous to operate their own People with significant control (PSC) company (also referred to as ‘beneficial owners’) and makes an Umbrella Company more attractive. Below is a brief indication of the benefits and shortcomings of working through an Umbrella company.
What are the Benefits of Joining Umbrella Company Scheme?
- It is very easy to use for a contractor – he/she just needs to file in their timesheet and payment details and based to the invoice a contractor will be paid.
- All National Insurance contributions (NICs) and taxes are subtracted before a contractor gets the payment, hence he/she does not have to be bothered about further payment of taxes.
- Working as an Umbrella company is most appropriate for short-range agreements and agreements with value less than £25,000 per year.
- Helps a contractor to understand if contracting is good for them.
- All the paperwork will be performed by someone else.
Disadvantages of Joining Umbrella Company:
- A contractor will receive the payment which is subject to pay-as-you-earn (PAYE) tax and National Insurance (NI) contribution whether a contractor is under the purview of IR35 or not.
- A contractor is dependent on an Umbrella Company to accumulate the money from the client and then make the payment to a contractor.
How to Join an Umbrella Company?
Once an individual has decided that he/she wants to work through an umbrella company, and has a contract role previously or established one, there are a few things that need to be considered when a contractor looks to join a contractor umbrella scheme. Below mentioned are a few things to be considered:
- Select a pay-as-you-earn (PAYE) umbrella scheme provider. A contractor should take time to research around the options available and it is not imperative to follow recommendations of a recruitment agent. Things to evaluate when selecting an umbrella company are:
- Fee structure: See to the fee charged by an Umbrella company i.e. monthly fee/fixed weekly. Does the company take a percentage of the gross invoice amount? Does the company take any charges if a contractor takes time off? Gather information about taxes, other deductions and the net payable amount that a contractor will receive weekly or monthly.
- Frequency of payment: Once a contractor has submitted their timesheet to an Umbrella company, he/she should exactly know the time-period when the amount will be credited to the bank account? Does an Umbrella company offer Bankers' Automated Clearing Services (BACS) or Clearing House Automated Payment System (CHAPS) or Faster Payments transfers.
- Insurance cover: Does the umbrella company provide an insurance cover. A contractor should generally be provided with employers’ liability policy, public liability policy, and Professional Indemnity (PI) insurance cover, as usually clients need contractors to be sufficiently insured before beginning an assignment. In the case of Professional Indemnity insurance, a contractor must ensure that their precise line of work is covered, as less conventional professions may be left out from a blanket policy.
- Business history / Agreement: Evaluate the number of clients an Umbrella company has, and the time-period since the company has been operating. Has the organisation been evaluated for tax compliance issues.
- Expenses exemptions: In case a company offers to claim for a wide range of ‘without receipt’ expenses, a contractor must be careful because a contractor can only claim for expenses that form part of the contracting work and an expense outside the purview of this can create problems for a contractor.
- Extra Costs: Are there any out of sight costs, such as leaving fees or enrolment fees? Usually, umbrella companies don’t charge extra fees.
- Preferred Suppliers: A recruitment agency usually has a certain number of umbrella companies as favoured suppliers. It still makes sense to evaluate the preferred suppliers as well as there is no guarantee on the selection parameter of these umbrella companies.
- Technology: Evaluate the web technology used by an Umbrella company employ. Preferably, a contractor should be provided access to intranet portals, common drives where he/she can enter timesheet details, check the status of payment or reason for delay, and submit queries or access online portal help.
- Pensions: Check whether the Umbrella Company provides a related pension scheme.
- Seek recommendations: A contractor must seek recommendation from other contracts about an umbrella scheme, and look through the web for reviews and feedback received from other contractors’ for an Umbrella company.
- Switching companies: A contract must ensure there is no hidden clause which prevents a contractor from moving to another company in case he/she is not happy with the present provider.
- Once an individual has discovered an Umbrella company he/she is comfortable working with, a contract must register online, or call the umbrella company to seek additional details. Usually, an Umbrella company activates a new account within 24 hours and more or less all the umbrella companies operate through an online portal as well, which makes communication easier as if it is managed via the web.
- When a contractor secures a contract role, provide all the applicable details to the company, such as the beginning and completion dates of the assignment, the agency or end-client details, and daily/weekly/monthly contract rates (few contractors also works on hourly rates).
- Provide recruitment agency with the necessary details about umbrella scheme. The client or agency will share a contract with the umbrella company to sign.
- A contractor will be required to make available some key information such as NI number, bank account details, P45 form etc. to the umbrella company.
- Depending on an umbrella company, a contractor will be required to sign a contract of employment.
- A contractor must input the timesheet weekly or monthly, basis the agreement with an Umbrella company and provide expenses details into the online billing system. Usually, umbrella companies run the payroll process bi-weekly and BACS payment process takes around 2-3 days to clear. Contractors can even request for same-day CHAPS payment or Faster Payments transfers. If a contractor uses the ‘Faster Payments’ system, it will be beneficial as it is instantaneous and free.
- The Umbrella company will invoice the recruitment agency, and process the expenses claims.
- Once an Umbrella company gets the payment from client or agency, a contractor will be paid post deductions such as Umbrella fees (the fees may vary for different umbrella companies but usually ranges between £25 per week to £30 per week for premium service, and can be low as £5 each week for basic work such as data entry, payroll service) PAYE, and NI.
Any questions? Schedule a call with one of our experts.
Whether you prefer to meet and speak over the internet, or if you prefer an in person conversation we can help you with your preference.
Stay up-to-date with the latest news affecting small businesses, get business tips and tax saving advice.